Decisions — Bargaining for a Deduction

While a bargain may be defined as something you can’t use at a price you can’t resist, in tax law, a bargain sale generally yields something you can use: a charitable deduction.

You make a bargain sale (treasury regulation 1.1011-2) when you sell property to a charitable organization for less than the property’s fair market value. The transaction is considered to have a dual character. Part is a sale and part is a donation to the charity, as long as you intended to make a donation and you don’t expect a substantial benefit in return. As with other charitable contributions, you have to get a written acknowledgment from the charity to take a deduction on your tax return.

In T.C. Memo. 2015-88 (Davis), the taxpayer, a philanthropist and real estate investor, sold land for $2 million to a charity that developed senior living centers. The fair market value of the land at the time of the sale was $4.1 million.

The charity had asked the taxpayer to donate the land with no remuneration. The taxpayer appreciated and believed in the charity’s mission and activities and in the benefit of having a retirement community in the local area, but he was not financially able to donate the land. The charity offered $1.6 million, which the taxpayer declined.

During negotiations, the charity told the taxpayer about bargain sales, which the taxpayer had not heard of. The charity eventually offered $2 million, plus a right to name a building erected on the land and some rights to have family members reside in the retirement community at reduced rates (the taxpayer wanted to secure housing for his mother). After talking with his accountant, the taxpayer agreed to the bargain sale.

In accordance with the negotiations, the taxpayer had a certified appraisal prepared as well as an environmental site assessment, and the transaction closed in September 2005. Because of differences between the benefits the charity believed the taxpayer would get and what the taxpayer understood he would get, the agreement detailing the taxpayer’s rights was not signed or made part of the final closing. Because the agreement was not signed, the taxpayer believed those provisions were unenforceable. He also believed the failure to agree on the benefits did not justify thwarting the transaction, given the value of the transaction to the charity and to the community.

The taxpayer claimed the $2.1 million donation on his 2005 federal income tax return and included supporting substantiation. He says the court should allow the deduction because he sold the land to the charity for less than its fair market value with an intent to contribute the excess value.

The IRS says the deduction should not be allowed because the taxpayer lacked charitable intent when he sold the land to the charity. Instead, he received consideration for the land in the form of $2 million plus other rights such as the proposed residency benefits.

The IRS also says the taxpayer lacked a charitable intent because he desired the tax benefits flowing from a charitable contribution. The IRS notes the taxpayer negotiated with the charity about the price at which he would sell the land. In addition, the taxpayer structured the transaction as a contribution in part only after he was informed of the concept of a bargain sale.

WHAT WOULD YOU DECIDE?

THE COURT’S DECISION

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the main post to read the entire case.

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✓Right answer!

Sorry, wrong answer :(

For the taxpayer.

The court finds that as of the time of the sale the taxpayer believed he was selling the land to the charity for less than its fair market value and he intended to transfer the excess value as a charitable contribution.

The mere fact that the charity suggested conveying the land as a bargain sale does not mean, as the IRS contends, that the taxpayer lacked a charitable intent as of the time of the sale. A finding of such an intent rests not on events that may have occurred before the sale but on the taxpayer’s intent at the time of the sale. The court finds that the taxpayer appreciated and believed in the charity’s mission and activities and in the benefit of the retirement community.

The taxpayer even went so far as to transfer the land to the charity although he learned at the closing that the residency and certain other benefits which he desired would not be included in the transaction.

The IRS also argues the taxpayer is not entitled to deduct the reported $2.1 million charitable contribution because he received or expected to receive significant benefits from the donation. The court disagrees.

The taxpayer received no benefit from the rights because those rights were not ultimately included. The charity explicitly required that the parties thereto execute a document at closing providing for such rights and the parties to the sale failed at the closing to execute the necessary paperwork to fulfill this requirement. The taxpayer and the charity disagreed at the closing as to their understandings of those benefits and the inclusion of those benefits in the sale and they did not follow up on the formalization or implementation of any of the rights.

The Court concludes and holds that the taxpayer had the requisite charitable intent at the time of the sale.

Note: This case contains other issues. Please read the entire case using the link provided in the main post.